Balanced Funds

What Is a Balanced Mutual Fund and Meaning

Balanced funds, also known as hybrid or blended funds, are types of mutual funds that own both stocks and bonds. This type of mutual fund provides investors with a balanced portfolio of stocks and bonds in a single mutual fund. Typically, stocks comprise 50% to 70% of a balanced mutual fund’s portfolio, with bonds accounting for the rest in balanced funds. The main aim of these types of mutual funds is to balance the risk-reward ratio of investors and optimise the returns on the balanced mutual fund investment.

Investing in balanced mutual funds offers investors the chance to diversify their portfolio as the funds involved in balanced funds invest in various instruments across equity and debt assets. Thus, balanced mutual funds benefit those who like some kind of risk in investment but not too much. Or put simply, balanced funds are ideal for someone looking for capital appreciation at minimum risk.

Purpose of a Balanced Mutual Fund

• The best balanced mutual funds offer investors stability by balancing capital appreciation with risk.
• A balanced hybrid fund combines the characteristics of equity funds, which typically invest almost 85% assets in stocks, and debt funds, which usually invest a similar portion in bonds and fixed-income instruments.
• Balanced funds in India are best investment options for people who may not fit well with pure equity or pure debt products.
• Balanced fund returns come with a lower overall risk by avoiding full exposure to equity.
• You get flexible investment choices with a balanced fund, meaning that you can choose between an equity-oriented and debt-oriented balanced fund for investment.
• These funds can help individuals, with no source of income, generate a steady income flow.
• Balanced hybrid funds enable capital growth while still allowing investors to maintain a safety net.
• Balanced mutual funds also allow investors to diversify their portfolio with minimal risk.

Taxability of Balanced Funds

The tax implications of the top balanced funds are taxed based on the orientation of the fund. Equity-oriented funds have at least 65% of their corpus invested in stocks, and they are taxed just like pure equity. This means that if you hold the investment for more than a year, the capital gains are treated as long-term capital gains or LTCG. LTCGs over INR 1 lakh on equity-oriented funds are taxed at the rate of 10% without the benefit of indexation. Short-term capital gains or STCGs on equity components are taxed at the rate of 15%.

Similarly, the debt-oriented funds of balanced funds are taxed just like debt funds. If the investor holds the investment for more than three years, the capital gains are termed short-term and taxed at normal rates. But if the investment holding period exceeds three years, then the gains are termed as long-term and are taxed at 20% after the indexation benefit, which significantly reduces the tax.

Who should Invest in Balanced Funds?

Balanced funds are best suited for investors who:

• Are planning to invest for a medium term.
• Are looking for a blend of safety, income, and modest capital gains.
• Prefer funds that strictly behave in line with their orientation, i.e., less than or equal to 65% as prescribed in the investment mandate, instead of adjusting their asset allocation based on economic conditions.
• Are looking for better returns during the bull runs.
• Are looking for a debt-backed buffer that prevents the erosion of their returns during the bear runs.
• Have dual investment objectives and want to earn inflation-beating returns.
• View inflation protection as a key advantage of fund investment.
• Are retired or have low-risk tolerance and want a steady income flow that can supplement their current needs.
• Want to protect their long-term purchasing power through equity exposure.
• Aim to preserve their retirement corpus over time.

Top Advantages of Balanced Mutual Funds

There are several advantages of balanced funds for investors. The top advantages include:

Risk Reduction

Investments done in equity markets pose high risks. On the other hand, the debt markets involve low risk. Hence, investments made through balanced mutual funds offer instant diversification and risk-adjusted returns in such a scenario.

Diversified Portfolio

Balanced funds are excellent for investors who want to diversify their portfolios. Investing in balanced funds is one of the best advantages, as the investment tool gives investors diversification in the form of a single fund. With only one investment, investors can have a diversified portfolio with dozens of equities and bonds.

Protection from Inflation

A portion of balanced mutual funds is invested in debt assets which can provide a hedge against inflation, primarily if the funds are invested in foreign bonds. Thus, balanced funds can protect investors from inflation by giving them access to countries that have not been affected by it.

Re-Balancing of Funds

There are times when the debt market is overvalued than the equity market and vice versa. In such situations, investors have the liberty to shift between the two major asset classes to protect the fund’s performance from market fluctuations.

Tax Benefits

Ideally, if investors try to move their assets from equity to debt, they are subject to tax liabilities. But in the case of balanced funds, the fund managers have the advantage of switching between debt and equity without presenting the investors with tax liabilities.